Consultants see IAS19 'sticking plaster' as important first step
GLOBAL - Pensions and investments consultants have expressed general support towards a what is described as a "sticking plaster" move by the International Accounting Standards Board (IASB), allowing companies to discount defined benefit post-retirement obligations against a government bond rate where they cannot comply with existing rules.
The IASB last week published details of an amendment removing from IAS 19 the requirement to discount a defined benefit pension obligation using a government bond rate where a jurisdiction lacks access to a suitably deep market in high-quality corporate bonds, in the hope of finalising any amendments "in time for early adoption by entities with December 2009 year-ends."
On the back of latest announcement, Eric Steedman, consulting actuary with Watson Wyatt, said he believed the move could complicate matters for some companies, but felt it was the right move to at least look at it.
"I think the change will be generally welcomed as an improvement to consistency. Whilst it will make choosing the assumption in many countries a more complex business, I do believe the IASB was right to address this as a priority," said Steedman.
"The inconsistencies between countries and even within countries, where different opinions were held about the depth of the bond market, had become much greater as a result of the financial crisis and much more disconcerting to plan sponsors," he continued.
Steedman added: "Companies will be looking at the transition provisions closely though. There will be relief that the IASB has not gone for a fully retrospective approach that might require reworking of past years' results, but the proposed approach will still mean a reworking of figures already set at the start of this year."
According to the exposure draft, entities will instead "apply the principles and approach in paragraphs AG69-AG82 of IAS 39 ... to estimate such rates by reference to yields on high quality corporate bonds denominated in the same currency and whose term is consistent with the currency and estimated term of the post-employment benefit obligations."
But Simon Banks, principal at UK consultancy Punter Southall, said although the move by the IASB to ease the burden of discount rate selection was welcome, it only serves to highlight the pressing need for the board to address measurement of defined benefit obligations.
"The current sticking plaster is a price we are paying for the delays in addressing the fundamental issue of measurement. The feeling among some market participants is that they would like to see the issue of measurement - in particular the discount rate - settled once and for all," said Banks.
"This is a very sensible sticking plaster and it certainly makes sense to try to align the situation in different countries. I doubt that the proposal will have too much impact in the UK. Only a multinational with a subsidiary that has a pension fund in a country lacking a deep bond market is going to be affected."
Banks added that any future consideration of the discount rate will inevitably reignite the debate over whether or not the IASB board should move to a risk-free rate, for the purposes of arriving at a net present value of a defined benefit commitment.
"Until the IASB and the FASB in the U.S. get stuck into this issue, and we see what else they come up with, I have no fixed view on whether or not they should move to a risk-free rate for discounting purposes," he said.
"There are clearly some strong arguments for risk-free, not least conceptually because if you move away from that starting point, you then need to have a clear rationale why you would draw the line at some other point."
Banks continued: "The approach of using a ‘risk-free' discount rate would simplify the task of hedging a pension obligation because it would bring the accounting measure more into line with the liability measures used by trustees and others, which are often based on discount rates that are a fixed margin above or below risk-free."
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